How to teach your children the value of money (and how to manage it)

Parents are more willing to discuss things like sex, drugs, and alcohol with their kids than money, according to a study from ING Direct.

Believe it or not, despite the financial difficulties of the past few years, parents are more willing to discuss things like sex, drugs and alcohol with their kids than money, according to a study from ING Direct. While all are indeed important subjects to cover, instilling within your children an accurate sense of the value of money as well as how to manage it responsibly will not only help them avoid future problems with debt, but may also prevent them from becoming mired in an economic downturn the likes of the Great Recession.

The question is how to go about doing so, and given that 42 percent of adults grade their own personal finance knowledge at a C-level or below, many of us will have to start with a bit of a refresher course so that we aren’t passing along misleading advice.

Nothing beats practical experience, though, which is why you should give your child an allowance while requiring him to pay for some of his own expenses when he enters high school. This need not be major costs like utilities and food, but even requiring that he pay for trips to the movies and other leisure-time activities while making it clear that you will not provide advances on his allowance if he spends all his money early will be helpful. You simply can’t truly appreciate the value of money unless it’s your money that’s at stake.

Start with a bi-weekly allowance, because it will force your child to do some basic budgeting without giving him too much money to play with at one time. As he demonstrates an ability to handle the responsibility, you can gradually decrease the frequency with which you dole out the cash while increasing the expenses for which he is responsible. It’s up to you whether you want to also increase the amount of your child’s allowance or require him to get a job in order to make up the difference. Some folks feel that kids cannot grasp a dollar’s true worth unless they’ve worked for it, and others are of the mind that people work the majority of their lives so children should enjoy their childhood.

What’s not up for debate, however, is the fact that consumers these days need experience using a variety of different financial products in order to effectively manage their personal finances and avoid common pitfalls, such as getting eaten alive by fees.

With that being said, here’s how to garner the best results from the aforementioned budgeting approach:

Start with a prepaid card: Prepaid cards offer nearly all of the same features as the traditional combination of a checking account and debit card — including direct deposit, online bill pay and the ability to make purchases as well as ATM withdrawals — yet do not enable you to overdraw your account or bounce checks (since you won’t have a checkbook). Using this type of card is therefore tantamount to riding a bike with training wheels, especially since parents can review spending history with their kids online. Prepaid cards are also known for charging a lot of different little fees that can add up quickly if you aren’t careful. While this would normally be viewed as a major con, it can actually provide parents with a number of great teaching opportunities.

Transition to a checking account: Using a checking account requires a greater level of maturity because errors can have lasting effects. Aside from triggering substantial fees, overdrawing your account or bouncing checks too many times can prevent you from qualifying for a checking account in the future. Plus, if you get the right checking account for your child, he’ll learn the value of earning rewards on everyday purchases.

Graduate to a student credit card: You might assume this to be a recipe for disaster given the proclivity U.S. consumers have shown to rack up credit card debt, but the truth is that it’s not hard to avoid debt when credit isn’t available to you, as is the case when using a checking account or prepaid card. And because your child will inevitably be exposed to credit, it makes sense to teach him how to resist the temptation of getting into any sort of debt. Having an open credit card account is also the most efficient way to build a solid credit score, which of course impacts one’s mortgage rate, job prospects, and ability to rent an apartment or lease a car.

Ultimately, it’s a parent’s job to prepare his or her child for independence and groom children to be productive members of society. If financial literacy continues to be an afterthought, not only will we be shirking our responsibilities, but we’ll also be setting future generations up to repeat our mistakes rather than learn from them and go on to bigger and better things.

Odysseas Papadimitriou is the CEO of the credit card comparison website Card Hub and Wallet Hub, a personal finance social network where you can review financial professionals and companies.